Not cool enough: Bleeding Lloyd gives Havells a hard time

“We haven’t been stocking Lloyd for some time now. There were some issues related to annual maintenance packages. Very rarely do customers ask for it, anyway,” a mildly irritated sales executive told this writer before listing out specifications and finance options for ACs sold by Voltas, a home appliance company from the Tata group, and Hitachi, a multinational aggressively selling its wares in India.

Lloyd is owned by Havells India, one of the country’s largest electrical equipment companies, which sells everything from switches and cables to fans and water heaters.

It is the same situation in nearly half a dozen stand-alone electronic shops in Noida’s Sector 18 market—only one shop had a Lloyd AC on display and could provide information about the product, pricing, and warranty. This sticks out like a sore thumb given that Havells claims that it is the No. 3 in the pecking order of AC manufacturers in India with an estimated market share of over 10%.

Lloyd’s revenue has more than doubled since 2017-18, from ₹1,414 crore to ₹3,400 crore in 2022-23. But investors and analysts have concerns, beyond its availability in retail stores.

Lloyd began in India as a joint venture under Fedders Lloyd, a multinational company, in 1956, but became a solo brand in 2007 when Fedders went bankrupt in the US. In February 2017, Havells bought the consumer durables business from the BR Punj Group, owners of Lloyd back then, for ₹1,600 crore. The acquisition announced Havells as a serious player in the consumer appliances business—besides ACs, Lloyd sells televisions, washing machines, and refrigerators.

ACs, nonetheless, have been the mainstay of the brand and still account for over 60% of its sales. So far, Havells has spent ₹2,500 crore (which includes the cost of acquisition) on Lloyd. Investments to beef up marketing, retail footprint, local research and development and manufacturing have been made. Manufacturing investments include two new factories in Ghiloth, Rajasthan, and Sri City, Andhra Pradesh.

Sure, these efforts have paid dividends. Lloyd’s revenue has more than doubled since 2017-18, from ₹1,414 crore to ₹3,400 crore in 2022-23. But investors and analysts have concerns, beyond its availability in retail stores.

The growth seems to have come at the cost of profitability as Lloyd finds itself in a gully with 10 consecutive quarters of operating losses (see chart). Never keen to give the long rope, analysts are growing restive.

“While Lloyd has a huge addressable market to cater to, the medium-term journey is likely to be one of very gradual margin accretion. Lloyd’s profitability is still two-three years away,” stated brokerage house Nuvama Institutional Equities in a note published after the company’s third quarter results were announced in January.

While the rationale for the acquisition appeared solid in 2017, Lloyd’s recent cash burn points to a different reality. The big question is if Havells can steer the boat in the right direction in the coming quarters.

The heartburn

In some ways, Lloyd’s financial performance in the last two years validates investor worries even at the time of the deal. On 20 February 2017, the day after the acquisition was announced, share prices of both the companies fell on the Bombay Stock Exchange. Havells fell 2.66% while Lloyd fell 16.75%. Over the course of the week, Havells fell another 3% before recovering.

These were the first indications of investor concern. Lloyd’s operating margin at that time, of around 6%, was lower than what its peers were reporting—10–13%. Moreover, Havells’ operating margin was even healthier at 14%. So, investors wondered if Lloyd would end up stretching Havells and diluting its profitability.

For now, this is how it is playing out. Havells’ core business of switch gears, cables, wires, lighting, and fixtures have much higher profitability. For example, switch gears had a 13% share of the company’s revenue of nearly ₹17,000 crore but contributed to 36% of its operating profit in 2022-23. The only drag was Lloyd. While it now accounts for 20% of Havells’ revenue, its contribution to the firm’s earnings before interest and taxes (Ebit) is a negative 14%.

There is little to suggest the script is changing. In the third quarter of 2023-24, which ended in December, Lloyd had a negative Ebit margin of 10.1% which compared unfavourably with all the other segments. Switchgear had a healthy Ebit margin of 24% during the quarter, followed by lighting and fixtures at 14.2%, electrical consumer durables at 11.2% and cables at 10.4%.

“The acquisition has not panned out as per the initial plans,” said Harshit Kapadia, vice president at Elara Capital, a brokerage house. “Its manufacturing cost is high as its plants are new and Lloyd is positioned on the lower end of mass premium. Thus, the losses. But, we expect them to reduce the losses over the next two years,” he added.

What went wrong?

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Lloyd was not in the best shape in 2017 and was in need of a complete overhaul. Dependent on imports from China with minimal in-house research and development, and not much scale to boast of in terms of manufacturing, the brand was perceived as a low-end player. Its retail presence was focused on the price conscious tier-II and -III cities of the country.

When Havells took over the business, it wanted to change that brand positioning. It had to invest in manufacturing, research and brand building to move the needle on perception.

Unlike Havells, Lloyd now finds itself competing in a very cluttered industry full of established players, including global firms. In the room AC market, for example, there are over two dozen players, including Voltas, Hitachi, Daikin, Blue Star, Carrier, Panasonic, Samsung, and LG.

It is difficult to grab market share in a hyper competitive market.

—Harshit Kapadia

Analysts point to this while talking of Lloyd’s financial performance. The gestation period of the investments yielding dividends is likely to be long and the consumer durables industry, by nature, has a lower margin profile than the core businesses of Havells.

“It is difficult to grab market share in a hyper competitive market,” said Kapadia of Elara. “Diversification beyond ACs is a long drawn process.”

According to industry estimates, Voltas is the market leader in ACs in India with over 20% share. South Korean company LG led the washing machine segment with 29% share as also refrigerators with over 30% share in 2022. Samsung, another South Korean giant, was the leader in televisions with 21% share by volume. Except for ACs, where it claims 10% share, Lloyd has a low single digit share in other segments.

The defence

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The headquarters of Havells is barely 5 km away from the Vijay Sales store we mentioned earlier. On a pleasant morning in March, this writer met Anil Rai Gupta, the company’s 54-year-old chairman and managing director, here.

He defended the purchase and exuded confidence.

“Vijay Sales is perhaps the only large retail store that doesn’t stock Lloyd ACs yet, but they will eventually,” he said. “When we took over the company in 2017, it wasn’t present in many retail chains but now, it is there everywhere. For example, the moment Havells bought Lloyd, Reliance started stocking it,” he added.

In fact, all of Havells’ management exudes this sort of confidence. During an investor conference, after its third quarter results, the company saw an uptick in demand, going ahead, and blamed high advertising spends for the relatively weak performance during the quarter. They also pointed to stabilizing raw material costs that will boost profitability for Lloyd in the future. Yet, no timeline was given for a turnaround.

“We believe consumer durables is a very large opportunity and if there is one category where India is least penetrated, it is the air conditioners,” Rajiv Goel, executive director at Havells, told analysts. “We have established good credentials and the market is getting consolidated in terms of the larger players. Let us not measure them in a few quarters here and there…We are here for the long term.”

How large is the opportunity?

ACs, washing machines, refrigerators, and televisions—the segments Lloyd is present in—is today a ₹1 trillion market in India, the industry estimates. Havells believes that these four segments will expand to ₹1.75 trillion in five years.

In comparison, the annual market size of Havells’ established business—the electrical business comprising cables, wires, lighting, switches and small domestic appliances—is ₹1.25 trillion today and is seen growing to ₹2 trillion over the next five years.

“I would like all businesses to grow at a similar pace but that doesn’t happen ever. Lloyd is a much bigger opportunity and our share is smaller than in the other businesses. So, without a doubt, we will grow faster there…more than 20%,” Gupta told Mint.

He believes that the building blocks for Lloyd are still being put in place and eventually it will not only be profitable but comparable with Havells’ core businesses.

I would like all businesses to grow at a similar pace but that doesn’t happen ever.

— Anil Rai Gupta

“Transforming the perception of a brand takes a long time. There is a mismatch between what a consumer wants to pay and the quality that we are offering. Once that is established, the business will become stronger,” Gupta said.

He is hopeful the investment in Lloyd will earn a very high return on capital and become a much larger player than it is today. “For us to be a meaningful player, we should not be tied at ₹3,000–4,000 crore of annual revenue,” Gupta said.

Weighing others down

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There is yet another fear. Is Havells, focused on turning around Lloyd, missing out on growth opportunities in its other businesses?

Analysts have been pointing at how Havells has not adequately expanded capacity in the cables and wire businesses. As a result, it has not fully exploited the demand surge in the current fiscal.

“Lack of investment in C&W (cables and wire) capacity has hurt Havells meaningfully, especially in FY24 when demand surged. Even now, Havells’ investment is sub-optimal in scale given the demand surge seen currently and may lead to it ceding further share to Polycab/KEI,” Nuvama stated in its January note.

Both Polycab India and KEI Industries are manufacturers of electrical wires and cables. Polycab is today the largest player in India’s cables and wire industry with an estimated 20–22% market share. Havells is No. 2 in the pecking order, at 15–17% share, industry estimates suggest.

Gupta admitted it may have missed out on the underground cables growth opportunity this year, but remains confident of catching up.

“When you have many businesses, sometimes you over invest or under invest in certain businesses. Not so much in wires, but in the underground cables business, we could have invested faster or looked at international markets more strongly,” he said.

“But, the strength of an established player is that they have the financial backing and the technology,” he further added. “They can come back fast. So, while we may have missed out a bit on cables, our new facility is coming up in Karnataka which will give us more capacity and we will be able to benefit from the growing demand.”

Gupta admitted that Havells may have missed out on the underground cables growth opportunity this year but remains confident of catching up.

Does the persistent questioning by analysts bother him?

Gupta said he is more concerned with making money for his investors than analysts nitpicking on its balance-sheet. But, of late, there is one person whose grilling he cannot escape—his son, the 26-year-old Abhinav Rai Gupta. He graduated from Harvard last year and is currently working with Bain Consulting. He is already taking a keen interest in the family business.

“He keeps grilling me. I almost feel overworked at home now,” Gupta joked.

Almost a decade ago, the senior Gupta took over Havells after the death of his father, Qimat Rai Gupta, the company’s founder. While retirement is not on the horizon yet, he would want to hand over a Havells group that is much larger and stronger when he does retire. A profitable Lloyd, too.